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Competitive Insurance Markets and Adverse Selection in the Lab

Author

Listed:
  • Dorra Riahi

    () (Ecole Supérieure de Commerce de Tunis, Tunis, Tunisia.)

  • Louis Levy-Garboua

    () (Centre d’économie de la Sorbonne, Pantheon-Sorbonne University, Paris, France.
    Paris School of Economics, Paris, France.
    CIRANO, Centre Interuniversitaire de Recherche en Analyse des Organisations, Université de Montréal, Montreal Province of Quebec, Canada.)

  • Claude Montmarquette

    () (CIRANO, Centre Interuniversitaire de Recherche en Analyse des Organisations, Université de Montréal, Montreal Province of Quebec, Canada.)

Abstract

We provide an experimental analysis of competitive insurance markets with adverse selection. Our parameterised version of the lemons’ model of Akerlof in the insurance context predicts total crowding-out of low risks when insurers offer a single full insurance contract. The therapy proposed by Rothschild and Stiglitz consists of adding a partial insurance contract so as to obtain self-selection of risks. We test the theoretical predictions of these two models in two experiments. A clean test is obtained by matching the parameters of these experiments and by controlling for the risk neutrality of insurers and the common risk aversion of their clients by means of the binary lottery procedure. The results reveal a partial crowding-out of low risks in the first experiment. Crowding-out is not eliminated in the second experiment and it is not even significantly reduced. Finally, instead of the predicted separating equilibrium, we find pooling equilibria. The latter can be sustained because insureds who objectively differ in their risk level do not perceive themselves as being so much different.

Suggested Citation

  • Dorra Riahi & Louis Levy-Garboua & Claude Montmarquette, 2013. "Competitive Insurance Markets and Adverse Selection in the Lab," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 38(1), pages 87-113, March.
  • Handle: RePEc:pal:genrir:v:38:y:2013:i:1:p:87-113
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    Cited by:

    1. Johannes G. Jaspersen, 2016. "Hypothetical Surveys And Experimental Studies Of Insurance Demand: A Review," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(1), pages 217-255, January.
    2. Dengov, V. & Melnikova, E., 2013. "Adverse selection in various insurance markets and the ways to deal with it (the experience of practical research)," Annals of marketing-mba, Department of Marketing, Marketing MBA (RSconsult), vol. 2, July.
    3. Jean-François Outreville, 2014. "The Meaning of Risk? Insights from The Geneva Risk and Insurance Review," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 768-781, October.

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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